Paying dividends: Cash or credit?
- PDF / 754,414 Bytes
- 11 Pages / 595.276 x 790.866 pts Page_size
- 94 Downloads / 173 Views
ORIGINAL ARTICLE
Paying dividends: Cash or credit? Chris M. Lawrey1 · Kathleen P. Fuller2 · Brandon C. L. Morris3 Revised: 14 May 2020 / Published online: 25 August 2020 © Springer Nature Limited 2020
Abstract This paper examines to what extent firms utilize lines of credit to fund cash dividends. We find that higher dividend payouts are related to higher liquidity and that dividend-paying firms who experience cash shortages will utilize credit lines to continue dividend payments. Additionally, we show that credit lines are a permanent component of dividend-paying firms’ capital structure. Our sample statistics indicate that dividend-paying firms are considerably different than non-dividendpaying firms. Dividend payers tend to be more liquid despite having less cash, have smaller credit line balances, have higher market capitalizations, have less long-term debt, are more profitable, and spend less on capital investments. We conclude that access to credit lines is an important component of dividend-paying firms’ capital structure while the level of cash is not. Keywords Working capital · Credit lines · Dividend policy · Liquidity JEL Classification G30 · G35
Introduction Dividend policy is an important decision in the life of a firm. Graham and Harvey (2001) find that CFOs consider the dividend distribution among one of the most important decisions managers make. The extant literature list firm size, growth opportunities, and profitability as key components of the dividend decision (Fama and French 2001; Benito and Young 2003; Ferris et al. 2006; Denis and Osobov 2008). DeAngelo and DeAngelo (2006) show that investors are willing to forgo dividends for potential growth opportunities; however, as a firm matures and its growth opportunities begin to decrease, investors expect management to * Chris M. Lawrey [email protected] Kathleen P. Fuller [email protected] Brandon C. L. Morris [email protected] 1
Mitchell College of Business, University of South Alabama, Mobile 36688, USA
2
School of Business Administration, University of Mississippi, University, Oxford, MS 38677, USA
3
Raj Soin College of Business, Wright State University, Dayton 45435, USA
payout excess cash. Once the firm begins paying dividends, their continued payment is expected and is priced into the firm’s stock (Lintner 1956). Failure to continue or maintain dividend payments are typically met with sharp equity price declines, giving rise to the notion that dividends are “sticky” (Lintner 1956; Pettit 1972; Ahrony and Swary 1980; Woolridge 1982; 1983; Eades et al. 1985; Healy and Palepu 1988). The desire to maintain a dividend levels is so strong that some firms even borrow to maintain the dividend payment (Denis and Denis 1993; Wruck 1994; Grullon et al. 2011; Farre-Mensa et al. 2018). According to a 2009 Wall Street Journal article by Liz Rappaport, TransDigm Group issued $425 million in new debt with more than $360 million of the proceeds used to pay a cash dividend. That same year, Intel sold $1.75 billion of
Data Loading...
